New column: The paradox of thrift

I must say that economists appear to find straightforward matters paradoxical. Not as if they are dealing here with Schroedinger's cat or Wheeler's delayed choice experiment!

the base problem here is the popularization of the stock market, rather than banks, as the place where the average citizen kept their savings.
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And this was brought about by the spreading of the myth "that you can't lose money in the stock market in the long term". This myth grew out of studies that posited that the stock market provided better "returns" than Social Security over the long haul. And while this may have been true at the time the studies were published, the popularization of the idea that stocks were always a good investment lead to grossly inflated stock prices as tens of millions of Americans got into the market (mostly through mutual funds, money market accounts, and 401ks/IRAs).
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As these investments increased in value, "saving" more became unnecessary -- their "savings" were increasing on paper without them doing anything thanks to stock inflation.
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That is where the real paradox lies -- the moment that Americans assume that the stock market is the best place to put their money is the same moment that the assumption no longer holds.
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(This switching of assets to the market also had another unintended effect -- local and regional banks no longer drove the economy through consumer and small business loans. The money that would have gone to the banks wound up in the stock market, where manipulation of financial instruments, rather than solid loan practices, became the key to financial success.)

One thing I'm surprised I haven't seen is an attempt for the government to attempt to cash in on this recent rush to thrift.
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May I recommend the concept of 'Stimulus Bonds'. If the government is going to borrow money, might as well borrow it from it's people, and there's a new avenue for thrifty decisions and personal savings to stimulate the economy through government projects.
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One would also hope that with this rush to thrift and people saving in banks, banks would increase lending, from what I've read it seems demand is there, but banks are skittish.
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-MBirchmeier

Let's recall that is was certainly not prudent to cut taxes, especially on the very rich, while financing a messy, inessential, expensive war. It's like we forgot about that, somehow.
As an old frugalista, I refuse to believe in the end, everyone ratcheting down their consumption will be bad. It's what the economy needs, it's what we need to do to tame global warming, and ultimately people working fewer hours would be great for building social capital. let's go for six hour days and let more people work. If we can pay for health care directly with the gov't and not through employers, that would make it way more feasible.

Justin -- update your link to Barry Ritholtz!

New link is http://www.ritholtz.com/blog/

Paradox - I always lie.
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Thrift is not the problem. The lack of government spending is. We know that in a fiat economy all transaction have a fundamental basis in confidence.
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We know that when FDR increased spending to the degree that it gave folks confidence in the full faith and credit of the United States to produce a widget in the future and the confidence for the consumer to purchase the soon to be made widget beacuse they were sure that they would find another dollar for the one spent...either through return on investment or return on work product.
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The problem now is that the economy has fundamental imbalances which undermine that confidence. If the FDIC had the cajones to temporarily nationalize BofA and Citi, then this whole problem would go away in 6 - 8 months. Happy days would be here again.
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What exactly is it that Obama, Bush, Paulson, Geithner, and our Legislature are so afraid of? Sweden did it, and they are still in business. Our desire to prop up the dollar? Desire not to piss off China, the House of Saud? It doesn't matter. Their investments, just as mine in BofA are screwed already. It is time to take a bath.

bryan-
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Is it lack of spending or lack of government spending that's the problem. I agree that government spending might be the easiest fix, but I thought the problem was decreased spending due to lack of confidence.
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-MBirchmeier

We know that when FDR increased spending to the degree that it gave folks confidence in the full faith and credit of the United States to produce a widget in the future and the confidence for the consumer to purchase the soon to be made widget beacuse they were sure that they would find another dollar for the one spent...either through return on investment or return on work product.
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"full faith and credit" has a very specific meaning -- its what backs debt instruments issued by the United States, and means "we'll do whatever is necessary to pay off this debt as scheduled"; and because the US has the largest economy in the world and is considered politically stable, the "full faith and credit" of the the US is considered about as solid as you get when it comes to debtor nations, Thus the use of that phrase in the above paragraph struck a discordant note.
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While I doubt that the US was in the same position during the depression I don't know for sure (the "full faith and credit of Great Britain" was probably considered stronger, because the empire, while showing cracks, was still mostly intact.) Does anyone know how US debt was perceived during the Depression?